European de-industrialization. The "silent Depardieu"

“When you act like Europe, you get growth rates like Europe” Rick Santelli
“The European periphery will likely remain in recession for at least 10 years” IFO Institute

A few days ago I was invited to give a talk at the London Business School and a student asked me what was the biggest mistake of European politics. “The conscious decision to support expensive and inefficient sectors, instead of promoting a process of substitution through quality, price and competitiveness.” Why? Because “picking winners” is easier, public funds are treated as if they belonged to no one, demand estimates are always optimistic and cost does not matter to politicians… Meanwhile, even the most patient investor gives up and leaves.The silent Depardieu.

I admire Gerard Depardieu, an excellent actor. After years of contributing tens of millions in taxes, he decided to leave his country due to the unbearable tax system. It was his right. That is why I use the term “silent Depardieu” to illustrate the process of European de-industrialization which is essential to understand the current economic environment and the loss of potential GDP.

The de-industrialization of Europe can not be attributed to liberal policies. In fact, if anything it is characterized by the implementation of giant “industrial policies”, Soviet-like plans of public spending on infrastructure, and government support to dinosaur-type national champions in “strategic” sectors. What our politicians call “growth plans.” Hundreds of billions … in debt.

The problem created by these plans is an enormous cost that citizens pay in taxes and excessive tariffs, and an “eviction effect” on companies, which need to close or leave to other countries because costs soar and the system penalizes start-ups. And now politicians ask for more of the same. Nothing like repeating a formula that has failed.

“Government’s view of the economy can be summed up in a few sentences: If it moves, tax it. If it keeps moving, Regulate it.And if it stops moving, subsidize it. ” Ronald Reagan

Blaming China or India, cursing globalization and promoting protectionism lead us to where we are. Stagnation and praying that next year “will be better.”

Governments have a role in the economic transformation of a country, of course. But their mission is not to maintain low-productivity sectors at all costs. Governments’ job is to understand globalization and facilitate the transition to high productivity economic models, encourage innovation, not subsidize it, and promote high education.The problem is that politicians do not like it, because it does not give photo opportunities inaugurating bridges.

The current model of “intervention-subsidy-fail-debt-impoverishment-subsidy” leads Europe, and peripheral countries in particular, to compete only through internal devaluation . This is our great success. We can produce cheap cars for another. Wow.

When the economic model is the policy of the ostrich of burying one’s head and wait for 2005 to return, hoping that the world will recognize our acquired privileges -that we refuse to other countries, the outcome is only recession and devaluation. Impoverishment.

No, exports of low value-added products and the destruction of domestic demand are not economic successes. They are the result of maintaining GDP through excessive government expenditure, uneconomic investment and overtaking China in unnecessary infrastructure and ghost towns. China may be able to afford it. We don’t.

Producing low added-value products for others, focusing on construction and concessions, leads to seeking competitiveness through lower wages. It’s a patch, but it impoverishes. There will always be a country willing to produce the same good at a lower price. The point is that the production of such good must not only have an adequate cost, but a technological and logistical advantage. Growth through margin expansion. Europe must change a rapidly decaying model and let change and innovation thrive, not try to go back to 1977.

The solution is not to make low cost components for other European countries, which in turn will impoverish to compete for the same factory. The race to zero always ends in nothing.

The industrial plans promoted by the European Union have been characterized by:

– A huge cost to the taxpayer. Industrial plans have always been promoted through spending, more debt, not through tax incentives and deductions. Now most of Europe has public debt above 90% of GDP.

– Capricious and non-economic political decisions to pick “winning sectors”, only to let them fall after a fake price and demand signal created by subsidies. Supporting non-competitive industries.

– Defending decadent sectors to “sustain employment” and keep alive zombie companies through subsidies, only to remove them, achieving neither a strengthened “national champion” nor wealth and employment. This creates a problem of managers that are “private-sector civil servants” and cronyism.

– When the money flows, states spend in low-productivity sectors and forget to invest in R & D. When the fund flow stops, they also forget. See the chart. Better not to subsidize, just give tax incentives.

All this would not be a serious issue if it wasn’t financed with debt, or if the tax policy and costs for businesses were bearable. However, when countries spend amounts exceeding 5-10% of Europe’s GDP per annum in subsidies and wasteful spending, the tax burden and costs escalate.

“Growth Plans” do not create jobs, they subsidize them for a very short period of time… leaving behind a load of debt. Remember the Plan E, the green initiative, the 20-20-20 plan… For every euro spent, according to our estimates, 1.25 euros of debt since 2006 virtually no net job creation. “It would have been worse otherwise”, we hear. No, when we have created such a debt problem. Not at all.

A system that in recession increases the tax burden by five percentage points and makes energy tariffs (Germany, Spain) rocket 30% above any commodity, is unacceptable for a company, especially small and medium enterprises, which account for 70% of value added in the periphery. They close or emigrate.

A parasitic European Union where there are too many “supervisors” and too little “doers” … makes the “silent Depardieu” happen more and more, as the assault on the entrepreneur deepens. Think of the recent examples of threats to nationalize Arcelor-Mittal’s operations in France, or how public administrations don’t pay suppliers but demand them to pay VAT of the unpaid bills in time!.

It’s not just just the money spent on maintaining declining sectors, is the accumulated debt and the cost of losing the opportunity to pursue innovation.

That is why they have to lower taxes, ensure legal certainty and reduce the size of the public sector . These three problems are engulfing any real recovery option and long-term productive investment.

This has repeatedly been alerted by the IFO institute and the Natixis report “The Vicious Cycle for Europe”.

We have proven for decades that “stimulating”-giving the State a check-book with debt- does not work. We now know that the “internal devaluation” only brings more taxes, less disposable income, less consumption, debt is not reduced, which leads to structural unemployment.

And, of course, due to the reducing number of companies and additional debt … lower of tax revenue, new adjustments and start again. Five steps back to take a step forward. It is no coincidence that the vicious circle is monopolized by peripheral countries, the most stubbornly committed to support declining sectors and promoting non-competitive industries through subsidies.

The solution is, and always has been, to attract capital, not reject it.

The new production model is not going to be created in a committee or a summit. Private investors will doi it. The State should facilitate the transition not through intervention, but by investing in education, lowering taxes for entrepreneurs, reducing bureaucratic obstacles and, above all, not subsidizing the expensive and inefficient sectors.

At the end of my talk in London, a student asked me, “Why does Spain not create a Spotify, or a Core Labs?” He is an Engineering Technology student and is preparing a start-up.

I asked: “Where are you opening your business, here or in Spain?”

He said: “In Westminster they have told me that I might not pay taxes during the first three years, so probably here … Why?”.

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4 thoughts on “European de-industrialization. The "silent Depardieu"”

Great post Mr. Lacalle. I would like share this post on my own blog if you don’t mind.

I would like to highlight the issue of immigration policy in EU. I learnt Spanish and would like to live in Spain or another European country and add value to the market here. However, getting a work permit in an European country has been rather difficult. Even in UK, authorities introduced a cap in 2010 on how many skilled workers can firms hire from outside EU. Most of the banks have moved substantial operations overseas. In US, 42% doctorate-level workers are foreign born. Immigrants file more patents per capita than do natives and during the 90s, 25% of of firms in Silicon Valley were founded by foreigners. With the aging population, I believe that EU is in an urgent need to reform immigration. It needs to increase taxes on taxation. It needs people who can help sustain the entitlements. Large companies that hire skilled immigrants tend to not only improve productivity but also help hire more nationals (from a Bill Gates testimony). They bring human capital, financial capital and add connections to opportunities abroad. I hope EU leaders can some day see immigration with a favorable lens.

I do not think you have to convince none of the readers of this blog. I ‘ve myself have been a highly skilled migrant worker and I could see how my presence, helped my host country.

Policy to embrace your ideas will not be implemented in Europe for several reasons

A)Many nationals, including unions and most political parties have a sense of ownership over the labour market, they understand that if a Spanish national has committed time and money to acquire certain skills, and job position should belong to that person before any foreigners…regardless of who is willing to work harder, longer or for less money. This is borderline racism.

B)Our social welfare is too generous (this is not a problem for Highly Skilled workers, but immigration in general) many are worried that if too many immigrants are allowed in, system will collapse (it will collapse anyway)

C) In Europe we are more worried about wealth redistribution than wealth generation. As population ages this problem will get worse. 90 years olds are concern about getting their pensions and all their medical bills paid, not about how is all that going to be financed.

I’d love to have you here but…have you considered Singapore? economy is quite open, with lots of opportunities for motivated individuals as yourself… and it seems they have recently understand they must off set their ageing population, which means they’ll increase the number of permanent residents and ease the rules to become a citizen.

I wanted to bring this up because in spite of being an important issue, it tends to be swept under the carpet because of the unpopular decisions it involves.

My country(India) has its own problems related to immigration policy. Some day I would like to do something about it in my own country. Perhaps when I gain enough knowledge, experience and credibility to voice my opinion to policy makers.

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